Small businesses are constantly worrying about their cash flow. As noted before on this website, according to a Bloomberg article, most firms are operating month to month with cash reserves only lasting an average of 27 days. To solve this issue, governments like the US, UK and Netherlands are stepping in to reduce payment periods.
The US government for example, “has implemented the Prompt Payment Act to help accelerate payments to small government contractors and subcontractors. The Act mandates that contractors are paid within 15 days of invoicing without requiring an early payment discount.” According to MIT’s Jean-Noel Barrot and the Harvard Business School’s Ramana Nanda, firms that receive shorter payment periods see, “a payroll increase of 10 cents for each accelerated dollar, with two-thirds of the effect coming from an increase in new hires and the balance from an increase in earnings.”
In addition technology is coming to the aid of small businesses with companies like FundBox, BlueVine and NowAccount allowing “small businesses to accelerate the collection of cash receivables, almost at the push of a button."
"For small businesses, long payment terms are a double edged sword. While large corporations have the purchasing power to demand extended terms, small suppliers are unable to do the same with their own supply base. They have to pay their suppliers early, and receive payments late. This further increases their working capital requirements.”
Does your company offer short payment terms for your small and diverse suppliers? “If not, it’s worth considering implementing such a program. It helps your suppliers, and also lowers your company’s risk of having to replace a supplier that failed because of insufficient working capital.”